Friday, 19 April 2013

5 Commodity Trading Mistakes You Could Be Making

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Commodity trading can be a risky task. A trader dealing with a variety of instruments can lose money at any instant. Margin calls and extreme volatility are two such ways how you can lose your money. Here are five commodity trading Investor mistakes that most often traders make.

5 Commodity Trading Mistakes You Could Be Making

Improper Money Management: A successful trader has a two way vision to his trade. He not only concentrates on his profits but also in preventing occurrence of any risks in the trade. He might use various money management techniques to prevent any losses. Someone who is new to this trading business, may think that a trade that has $100 of potential gains and $500 as potential loss, would be a worth considering trade. But in reality, a trader must be very much concerned about the risks whatsoever associated with the trade. Diversification is a money management technique which advices using only a small part of an account in a single position. Proper position sizing is also essential using certain formulae like Kelly Criterion. Using automated trading system can be helpful as many traders are affected by emotions while trading.

Understand the implications of margins: There are various commodities that require margin in order to work on price volatility. Trading on a margin have benefits but are risky. A position established with a sure gain may fail if it doesn’t account for volatility and lead to losses as it may bring premature margin call. Initial margin is something to be considered before making a decision. Maintenance margin is the amount that a losing future would need so as to bring it back to the initial margin. This also needs to be taken care of. Commodity Futures Trading Commission program called SPAN is used to calculate the commodity margin rates. As the exchange keeps on making changes in the margin as per the market conditions, it becomes crucial for the traders to keep track of those changes and remain updated with every change.

Overtrading an account: Overtrading may lead into excessive commissions and would later on feed on your profits. Just to make a comparison between two trades, first of which is working on 100 accounts in a week and second that works on 100 accounts a month, you can clearly understand that the commission in the former case would be much more than that in the second case. So, overtrading is to be avoided. Using wrap accounts can be helpful to avoid excessive commissions. In this case, there is a flat rate of commission on the account. So, the number of trades is not a criterion for the amount commission deducted. Moreover, dealing with fewer trades is better than handling a high volume trading.

Lacking patience: Patience is essential when trading commodities. Beginners in this field are often seen to lose their patience and get into severe losses. Some tips regarding this include avoiding any emotional response to a condition and stay patients to reap the benefits in the long term. Automated trading system can help these traders to take automated decisions. No guess work is to be used and instead of that you should use the automated trading system calculator. Many starters place trades during the market hours which are not constant and so the trader may take emotional decision based on mood swings. Instead, try placing trades afterhours when the market is bit stable.

Failure to look at the big picture: Stay aware of the future prospects of a trade. Some trades may appear out bursting in the short run but would be exactly opposite in the long run. So, take proper care of all the aspects. Stay aware of the commitments of the trader’s reports. These reports are generated by the CFTC every week and it provides with an overview of the positions that the commercial traders hold. Always follow the trend. Look at the daily charts and even hourly changes so as to make a proper decision and work as per multiple time frames.